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A quick guide to variable-rate Cash ISAs

If you think you might need to get your hands on your cash savings quickly, but you still want to save in a tax-efficient way, you could choose a variable rate Cash ISA.

How do variable rate Cash ISAs work?

A Cash ISA (Individual Savings Account) is a type of savings account which lets you save up to £20,000 each tax year (this is your ISA allowance) without paying tax on any of the interest you earn on your savings, and you don’t have to declare it on your tax return. They are useful for high earners with a lot of savings who might not be covered by the personal savings allowance, which lets you earn £1,000 of savings interest tax-free as a basic-rate tax payer, or £500 if you’re in the higher-rate band.

A no-notice variable rate Cash ISA lets you access your money at any time, or you could go for one with a notice period or a fixed term for a better rate, but the interest rate you can earn is subject to change.

Pros and cons of variable rate Cash ISAs

You can only open one Cash ISA in any tax year, but you can hold more than one. You can switch any money you hold in an ISA so, for example, if you had a fixed-rate Cash ISA and the term came to an end you dropped to a worse interest rate, you could do an ISA transfer to move your money to a higher-interest paying account. Note that you must not withdraw the money in cash and pay it in to a new account, you have to do an actual ISA transfer as otherwise you would lose the tax benefits.

If your variable rate Cash ISA is a flexible one (some providers offer these, but not all), you can withdraw money and put it back later without it affecting your annual ISA allowance.

The main advantage of a variable rate Cash ISA is that they can be flexible and easy access, so you can get your savings when you need them, although some accounts can have a fixed term and still pay a variable rate. Your savings are protected up to £85,000 in the event your FCA-regulated provider collapses.

The main disadvantage is that you might not get a brilliant interest rate – in January, the average rate on a no-notice variable rate Cash ISA was 0.85%, or 1.12% for a notice variable rate Cash ISA, according to Moneyfacts. Inflation is currently running at 1.8%, so if your savings are earning less than this in interest, you will see the real value of your savings pot shrink over time.

Plus, there is uncertainty over the rate you will get, as a variable rate product can change what it pays in line with the Bank of England’s base rate of interest. Rachel Springall, finance expert at Moneyfacts, comments:

“While savers escaped a base rate cut from the Bank of England this month, there is uncertainty as to whether this could be just around the corner or indeed later this year. Regardless of any change, it is vital that savers shop around as it is clear to see that speed is key to grab the most lucrative rates.”

Where are the best deals?

  • Kent Reliance offers a Two-Year Tracker Cash ISA with a variable rate which will always be 0.75% above the Bank of England base rate. Currently the AER is 1.5%. Withdrawals will lose you 180 days’ worth of interest.
  • Virgin Money has a One-Year Fixed Rate e-ISA paying 1.36% AER variable, but you lose 60 days of interest for early withdrawals.
  • Al Rayan Bank pays 1.36% AER variable on its Instant Access Cash ISA, which is Shariah compliant.

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